Forint slides after EU, IMF suspend Hungary talks

BRUSSELS 
Hungary's currency slid against the euro on Monday after the European Union and the International Monetary Fund broke off talks on the country's bailout package, demanding bigger spending cuts.

Hungary must meet strict targets to reduce debt in return for a euro20 billion ($26 billion) loan from the European Union, the IMF and the World Bank that it received in 2008.

The EU and the IMF said Saturday that Hungary isn't doing enough to slash spending or make long-term reforms to its economy - and that they would suspend talks to give the government more time to resolve "a number of open questions."

Markets reacted by sending the Hungarian forint to its lowest point against the euro since early June, trading at 290 forints on Monday from 282 on Friday.

EU and Hungarian officials played down the impact of suspension on Monday, with the European Commission saying there would be "no direct, immediate consequences" for the country.

He also said that the stability of Hungary's economy was not threatened by the delay and that "some uncertainty" in financial markets could remain until Thursday when parliament will vote on part of the government's economic plans, Hungarian state news agency MTI quoted him as saying Monday in Vienna.

Analysts saw no long-term worries over the bailout package - but warned of short-term ructions and a "weaker and more volatile forint" until the government firms up its budget cuts.

"In the meantime, concerns over the prospects for the new program and lack of flexibility on the government's side are likely to have negative impact on the Hungarian assets," said Magdalena Polan, an economist at Goldman Sachs.

Hungary's ruling party Fidesz faces municipal elections on Oct. 3 and is reluctant to tighten austerity measures that have already become too much for the country to stomach.

Under pressure from the EU and international lenders, the country has been trying to curb spending for the last four years after former prime minister Ferenc Gyurcsany admitted that the country's officials lied about the state of the economy to gain entry to the EU in 2004.

The 2008 financial crisis hit the country particularly hard because many homeowners had taken out loans in foreign currencies at much lower interest rates - mainly the euro and the Swiss franc. Monthly repayments surged when the forint fell, leading to fears of soaring defaults.

Hungary says it has made all the cutbacks required to reduce its deficit to 3.8 percent of gross domestic product this year.

But the EU says that isn't enough and that it needs to take "tough decisions, notably on spending" to bring the budget gap - the difference between what a government spends and receives - under the EU limit of 3 percent by next year.

It also criticized a two-year temporary levy on banks aimed at raising $916 million that it says could cause "a significantly negative impact on the country's investment climate and economic growth."